A second major peer-to-peer file sharing service waved the white flag Wednesday. In testimony before the U.S. Senate Judiciary Committee, the president of the company that distributes the eDonkey P2P software said that under legal pressure from the Recording Industry Association of America (RIAA) he was giving up. "Because we cannot afford to fight a lawsuit – even one we think we would win – we have instead prepared to convert eDonkey’s user base to an online content retailer operating in a 'closed' P2P environment," said Sam Yagan, the president of MetaMachine, Inc., in a statement before the committee.

"I expect such a transaction to take place as soon as we can reach a settlement with the RIAA. We hope that the RIAA and other rights holders will be happy with our decision to comply with their request and will appreciate our cooperation to convert eDonkey users to a sanctioned P2P environment," added Yagan.

Yagan's decision to take eDonkey to a private P2P model follows the demise of another file-sharing player, WinMX, whose Web site went offline last week.

Both decisions were driven by letters sent Sept. 15 by the RIAA to seven prominent P2P networks, demanding that they either implement technology acceptable to the RIAA or shut down. eDonkey, which is owned by MetaMachine, received one of the letters, as did WinMX, LimeWire, BearShare, and others.

In turn, the RIAA's actions were based on this summer's Supreme Court decision in MGM Studios v. Grokster, when the court ruled that file-sharing services were responsible for copyright violations if they intended customers to use software primarily to swap songs and movies illegally.

Yagan also predicted that because of the Grokster decision and the RIAA's legal threats, file-sharing innovation in the U.S. will screech to a stop. What technology advances do come, he said, will come from overseas, where U.S. law can't reach.

"It’s hard to imagine future P2P companies opening shop as American corporations," said Yagan. "That will be unfortunate because some of the benefits of companies operating in the U.S. are that they are easy for entertainment rights holders to access, they can be held to the contracts they sign, and they can be made available to provide input to Congress. I predict that, unfortunately, innovation in this area will come to a halt.

"Perhaps the hottest P2P company (or any technology company for that matter) of the moment is Skype, which eBay recently acquired for more than $2 billion. Where was Skype founded? Not in the United States. That represents hundreds of millions of tax dollars that will not be collected by federal, state, and local governments.

"Where are the Skypes of tomorrow being founded? Your best bet is to look offshore."